Investment action
I recommended a buy rating for CCC Intelligent Solutions (NASDAQ:CCCS) when I wrote about it the last time, as I expected CCCS to continue growing as guided, and margins should expand accordingly. Based on my current outlook and analysis of CCCS, I recommend a buy rating. I remain positive about CCCS’s ability to grow after reviewing the latest results and product launches.
Review
Total revenue grew 11.3% during the 3Q quarter, which marks an acceleration from the 9.8% growth seen in 2Q23. 3Q23 revenue growth can be broken down into 3 parts. About 8 percentage points came from up-selling, and 3 percentage points came from adding new logos. Net dollar retention in 3Q23 was 107%, a consistent rate over the previous two quarters (107% for 2Q23 and 106% for 1Q23), thanks to strong execution on cross/up-sell initiatives. As for the remainder, they were driven by new solutions. Overall, CCCS had a strong 3Q23, exceeding consensus estimates by 2% in revenue and by 150 basis points in EBITDA margin (CCCS reported a 42% adj EBITDA margin). As a result, management was confident enough to increase the midpoint of 2023 revenue guidance by $7 million, or 1% equivalent.
In line with management’s view, I am positive that CCCS can grow as guided due to the various product launches, upside potential in the Parts segment, and CCC ONE.
For product launches, there are a few highlights to mention. First off is the launch of Impact Dynamics in October. To recap, Impact Dynamics aids insurers in identifying risk earlier in the claims cycle and enhances operational efficiency by using photographs to forecast the severity of an accident. The product has been well received so far, with its recent adoption by a top-5 auto insurer. This speaks a lot about the value proposition of Impact Dynamics, in my opinion. According to management, the insurer has been a satisfied CCC customer for many years because of their expertise in Auto Physical Damage. The fact that they are willing to adopt CCCS casualty solution is a positive indication that other customers might do so as well. In terms of growth runway, CCC has over 300 APD clients, but only about 50 of them are also casualty customers as of 3Q. This suggests that CCC has a lot of room to increase sales of this product. Given that CCCS has proven to be a shrewd executor in terms of upselling (evident from the consistent net dollar retention over the past 3 quarters), I am hopeful that this will continue to drive growth.
Yet today, only about 50 of our more than 300 APD or auto physical damage customers also use our casualty solutions and our revenue from APD is 4 times that from casualty. 2Q23 call
In addition to Impact Dynamics, CCCS also launched CCC Amplify, a simple website-building option accessible via the CCC ONE platform, to assist repairers in enhancing their online visibility and attracting new customers. Given that most customers are not IT specialists, the fact that Amplify can be done even with little to no technical skills greatly decreases the adoption friction. CCC First Look is another recent product release; it makes use of AI to verify images before they can be integrated into other CCC products, and it aids in the most efficient routing of each claim. Last but not least, CCCS introduces the Repair Cost Predictor, an AI-powered tool for automating preliminary damage assessments and estimating how much it will cost to fix any given damage. This will help streamline operations, especially in a sector that is experiencing a shortage of qualified workers. In my opinion, all of these solutions do not have a huge impact if they are offered by a standalone point solution provider. But because it is provided by CCCS, all these solutions further improve CCCS overall product, making it more sticky as customers adopt more of CCCS products, entrenching CCCS deeper into their workflows.
Following up on CCCS Parts segment, which was one of my anchor points in the previous posts. The quarter came with another positive development as CCCS brought in new Lexus and Toyota dealers. Keep in mind that 13 of the top 15 automotive OEMs already use CCC’s network to move roughly 15% of industry parts volume; the addition of these dealers further strengthens CCCS’s position in the market.
Finally, CCC’s repair shop business, CCC ONE, is an exciting growth catalyst. Since 2010, this division has expanded tremendously, going from 20k shops to more than 29k shops now. The percentage of clients that use two or more products has increased significantly, from 10% in 2010 to 67% currently. Once again, this demonstrated CCCS’s skill in expanding its customer base through cross-selling. Product launches in this business unit have gotten me optimistic about growth as well. For instance, CCC Engage and Google’s Business Profiles, Search, and Maps are all interoperable with CCCS. This would make the workflow smoother on the consumer end, (which increases retention rate). Mobile Jumpstart is another new product that I have high hopes for. This allows repair shop estimators to create estimates on their phones, which I see as a significant improvement in operation workflow as they do not need to record findings on paper and calculate everything when they are back at their desks.
Valuation
Author’s work
I believe CCCS can grow faster than my original expectations after reviewing the 3Q23 results and also seeing all the new product launches. Aligning my assumptions with management’s guidance, I increased my growth and EBITDA assumptions by 100 basis points across the forecasted period. With the business growing modestly above historical trends with a positive EBITDA expansion outlook, I am modeling CCCS to continue trading at 20x forward EBITDA, which is its historical average.
Risk and final thoughts
CCCS has launched quite a few products and solutions recently. While I see it as a positive driver for growth and increasing stickiness of the CCCS solution amongst customers, I am worried that CCCS is splitting its R&D resources too thin. If not handled properly, it might impact the performance of other products, which will surely impact growth. In conclusion, my stance on CCCS remains a buy based on robust 3Q23 performance and continued product launches. Revenue growth at 11.3% surpassed expectations, propelled by upselling, new client additions, and innovative solutions. Reflecting management’s positive outlook, I’ve adjusted growth and EBITDA assumptions upwards, and continue to value CCCS at its historical average of 20x forward EBITDA.
